Consumers — not Uber's CEO — Are Responsible for Uber Drivers' Falling Income

After getting caught flinging obscenities at one of Uber's drivers, Uber CEO Travis Kalanick has issued an apology saying he (Kalanick) needs to "grow up."

The short shouting match ensued when Uber driver Fawzi Kamel picked up Kalanick for a ride. Kamel proceeded to criticize Kalanick for Uber's policies and for the reductions in fares implemented by Uber's management in recent years. Kamel claimed that Uber's policies drove him into bankruptcy.

Before flying off the handle, Kalanick had initially tried explaining to Kamel that Uber had to cut fares in oder to stay competitive:

Kamel: “You’re raising the standards, and you’re dropping the prices.”

Kalanick: “We’re not dropping the prices on black.”

Kamel: “But in general the whole price is—”

Kalanick: “We have to; we have competitors; otherwise, we’d go out of business.”

Kamel: “Competitors? Man, you had the business model in your hands. You could have the prices you want, but you choose to buy everybody a ride.”

Kalanick: “No, no no. You misunderstand me. We started high-end. We didn’t go low-end because we wanted to. We went low-end because we had to because we’d be out of business.”

Kamel: “What? Lyft? It’s a piece of cake right there.”

Kalanick: “It seems like a piece of cake because I’ve beaten them. But if I didn’t do the things I did, we would have been beaten, I promise.”

Kamel: “But people are not trusting you anymore. … I lost $97,000 because of you. I'm bankrupt because of you. Yes, yes, yes. You keep changing every day. You keep changing every day.”

While he could have been more compelling in his explanation, Kalanick is right and the driver is wrong.

Contrary to what Kamel thinks, Uber cannot simply dictate prices to consumers and expect them to pay. On the contrary, Uber is at the mercy of consumers, and if Uber doesn't respond to what consumers are willing to pay for rides, Uber will, as Kalanick states, "go out of business."

Kamel, meanwhile, seems to be under the impression that Uber "ha[s] the business model in [its] hands" — whatever that means — and can "have the prices [Uber] wants."

Kamel is wrong. Unlike the Taxi industry in cities that prohibit competition, Uber does not enjoy monopoly or near-monopoly power, and is subject to competition from other ride-sharing organizations and from legacy Taxi companies. Given the very nature of Uber and the legal environments in which it operates — i.e., jurisdictions where competition is allowed — Uber most certainly cannot "have the prices it wants."

The capitalists, the enterprisers, and the farmers are instrumental in the conduct of economic affairs. They are at the helm and steer the ship. But they are not free to shape its course. They are not supreme, they are steersmen only, bound to obey unconditionally the captain's orders. The captain is the consumer... The real bosses [under capitalism] are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses. They are full of whims and fancies, changeable and unpredictable. They do not care a whit for past merit. As soon as something is offered to them that they like better or is cheaper, they desert their old purveyors.

Moreover, as Per Bylund recently explained, the cost of doing business for both Uber drivers and Uber itself do not determine prices for their services. Kamel seems to think that he needs to be assured a certain level of income that covers his costs if he's going to be an Uber driver. But, that's not how it works.

The fact is that prices are not a result of costs; it is the other way around. Actually, prices and costs are not even “set” by the same types of economic actors. Prices are ultimately set by consumers through their valuations of goods and services offered to them. Costs are, for each production undertaking, a choice based on the judgment of the producer. In other words, prices aren’t set by entrepreneurs and their businesses — they are discovered by them. Costs, on the other hand, are assumed by producers — chosen because they are estimated to be less than the anticipated price that the final good warrants on the open market.

If Kamel wants higher fares, he should complain to the consumers and not to Uber's CEO. The fact is that the consumers do not value Kamel's services at a level that allows Kamel to cover his costs. If he is going to succeed as an entrepreneur (which is essentially what Uber drivers need to be) then Kamel — like all entrepreneurs — needs to figure out how to provide services at a cost below the price level that the consumers are willing to pay. If he cannot do so, Kamel should abandon his plans to drive for Uber and produce a good or service that can be provided at a cost below the consumer's preferred price.

Before he gets into a heated argument with any more of Uber's driver's, CEO Kalanick might consult Mises on consumer sovereignty. It might save him some embarrassment.